The green currency is in danger.. Are China and Russia an anti-US dollar axis?

Introduction to translation

For decades, the dollar dominated the world economy, and was the main currency of reserve and financial exchanges between countries.

This not only helped the United States maintain its position as an economic hegemon, but also enabled it to effectively employ the weapon of sanctions to punish its opponents.

However, with the increase in the number of people affected by the dominance of the dollar, a number of powers, led by Russia and China, are looking for a new financial system that would strip the green currency of its strength.

Is it really possible to do that?

translation text

Russian forces are now seizing territory throughout Ukraine, bombing both military and civilian targets, and are close to capturing the Ukrainian capital, Kyiv.

The Western response to the actions of Russian President Vladimir Putin was marked by sharpness and anger, and the allies of the United States of America united against the Russian invasion.

In turn, US President John Biden, as a leader of the international community, imposed punitive sanctions on Russian elites and companies with the intent of crippling the Russian economy and forcing the Russians to change course.

However, these measures have so far failed to force Russia to cease fire or withdraw from Ukraine.

Only a month has passed since the war, and we still have days to see what Putin will do if these sanctions inflame greater popular discontent in Russia.

But these sanctions may also come the opposite of what you want on the other hand, as Biden’s flexing of the muscles of the American economy will only encourage Russia and the equals of the United States of America - led by China - to strip the United States of the same power that makes sanctions so destructive.

Soon, Russia and China will establish initiatives to "dedollarize" their economies;

Creating alternative financial institutions and structures to protect themselves from sanctions and threaten the status of the US dollar as the dominant currency of our world.

Without concerted action, the United States will struggle to negate this movement and will see its global standing eroded.

The hegemony of the US dollar in the global financial system, backed by live US markets and its unmatched military power, is what makes any sanctions imposed by Washington huge and effective.

No other currency - including the euro and the yuan - has come close to displacing the dollar from its central place in the global economy and in global financial markets.

The dollar is the most widely used reserve currency around the world, the primary billing currency in global trade, and the leading currency in global financial institutions.

The dollar also dominates global stock markets, commodity markets, bank deposits, development finance and global corporate borrowing.

In times of crisis, people rush to the dollar as their first choice for a safe haven currency.

Effectively, US sanctions subjugate the foreign aggressor's financial power and impede it from accumulating capital in global markets to finance its activities.

Russia may be the most visible and outspoken champion of de-dollarization, but its agenda is well accepted by the great powers.

China's commitment to diversify its foreign exchange reserves, by encouraging it increasingly to conduct transactions in yuan, and also to reshape the global currency system through changes in the International Monetary Fund, only reinforces Russia's strategy.

And deteriorating US-China relations are spurring Beijing to join Moscow in building a credible global financial system that alienates the United States.

In fact, such a financial system would attract countries under the yoke of US sanctions, and might even attract US allies who would like to strengthen their currencies at the expense of the dollar.

The Biden administration, when imposing sanctions, must consider not only how they will affect the war in Ukraine, but also how they will transform the global financial market.

in the grip of the dollar

Russian policymakers have been, for at least a decade, wary of the dollar's dominance.

In 2012, Russian Deputy Foreign Minister Sergei Ryabkov expressed Russia's concern about the dollar's dominance in the world trade market.

In the wake of the 2014 occupation of Crimea, the Obama administration expanded sanctions against Russia, targeting a number of major Russian banks, as well as energy companies, protection firms, and wealthy pro-Putin supporters.

and accordingly;

The Russian government has launched two critical systems of financial infrastructure to evade sanctions and maintain its financial independence in case it is pushed out of the so-called Association for International Interbank Financial Telecommunication, or SWIFT, which allows banks to communicate with each other.

The first system launched by the Russian government was the adoption of an independent national payment system that served as a Russian alternative to payment systems such as Visa and MasterCard.

The Russian Financial Correspondence System (SPFS) became fully operational in 2017, sending transaction messages in any currency, and it had 38 foreign partners from 9 countries in December 2021, and as of this March it has more than 399 users, including more than 20 Belarusian banks, the Armenian bank "Arshid Bank" and the Asian bank "Kyrgyzs".

Affiliates of Russian banks in Germany and Switzerland - the two most important financial power centers in Europe - have access to SPFS, and Russia is currently negotiating with China to join this system.

This alternative financial infrastructure enables Russian companies and individuals to maintain some, albeit limited, access to global markets despite sanctions.

In 2018, the Russian Central Bank significantly reduced the share of dollars in Russia's foreign exchange reserves, replacing it with the purchase of gold, the euro and the yuan.

The bank also withdrew many of its deposits from US Treasuries.

The Russian Bank also reduced its holdings between March and May 2018 from $96.1 billion to $14.9 billion.

In early 2019, the bank reduced its dollar holdings by $101 billion, more than half of its current assets.

Following the sanctions imposed by the Biden administration in 2021 on Moscow, Russia announced its decision to wipe out entire dollar assets from the $186 billion National Wealth Fund, a key national sovereign wealth fund.

Since starting his fourth term in office in 2018, Putin has vowed to defend Russia's economic sovereignty against US sanctions and priority policies that are pushing the country's economy off the dollar's hand.

Putin called for "liberation" from the "captivity" of the dollar in the global oil trade and in the Russian economy, because the monopoly of the US dollar is "treacherous" and "dangerous."

In 2018, the Putin administration backed a plan designed to reduce Russia's vulnerability to future US sanctions by using alternative currencies in international transactions.

Since then, major Russian energy companies have stopped using the dollar.

In fact, Gazprom Neft, the third largest oil producer in Russia, sold all of its exports to China in 2015 in yuan.

Rosneft, the largest Russian oil and gas company, has switched all of its export contracts from US dollars to euros since 2019. In effect, the euro has replaced the dollar as the primary vehicle for trade between China and Russia.

Data from the Russian Bank shows that by the end of 2020, more than 83% of Russian exports to China were settled in euros.

Russia and China last month signed a 30-year contract under which the two countries accepted the use of the euro for gas sales linked to a new pipeline.

Russia is also preparing to launch a state-backed cryptocurrency that could avoid the dollar.

Sanctioned Russian entities can trade directly with anyone willing to accept the digital ruble without first converting it into dollars, and then bypassing the dollar-based system entirely.

According to an advisory paper issued by the Russian Bank in 2020 on the digital ruble, the government will invite non-bank financial institutions such as stock exchanges and credit institutions to join the digital ruble network.

Thus, this new system could provide Russian banks with an alternative source of access to international liquidity and reduce their exposure to sanctions.

A Growing Anti-Dollar Alliance

Russia's unilateral initiatives to evade the dollar's grip may be defensive in nature, but they have also paid off with other countries to break out of the dollar's dominance.

These coalitions represent a long-term threat to the dominant role of the dollar in world trade, and thus a challenge to the global leadership of the United States of America.

The common desire to reduce dependence on the dollar has strengthened relations between Russia and China. Bilateral currency swaps between the two central banks helped Russia bypass US sanctions in 2014 and facilitated trade and investment between the two countries.

In this context, Prime Minister Dmitry Medvedev in 2016 called for harmonizing the domestic payment systems between the two countries, and discussed the possibility of launching a Russian-Chinese cross-border payment system for direct settlements in the yuan and the ruble, while Putin said in 2018 that Russia and China ""

For its part, in 2019 China upgraded its relationship with Russia to the rank of "comprehensive strategic partnership of coordination for a new era", the highest level of China's bilateral relations.

The Russian Central Bank has since invested $44 billion in the yuan, which raised Russia's level of foreign exchange reserves of the Chinese currency from 5% to 15% in early 2019. Russia's yuan savings are about ten times the global average, which represents almost a quarter The global reserve of the yuan.

In 2019, China and Russia signed an agreement that would increase the use of the two countries' domestic currency in cross-border trade to 50%.

In 2021, the Russian foreign minister called on China to work with Russia to reduce their dependence on the US dollar and on Western payment systems.

The Russian government has authorized the Russian sovereign wealth fund to invest in yuan reserves and Chinese government bonds.

Putin is actively seeking to expand such alternative financial infrastructures through Russian agreements with other countries.

In 2019, Russia and Iran linked their financial banking correspondence systems, thus bypassing SWIFT by allowing banks in both countries to send cross-border transaction messages between them.

Russia and Turkey have discussed the use of the ruble and the Turkish lira in their cross-border trade.

Russia presented its version of "Swift" to banks in the Eurasian Economic Union (which is a partnership of five post-Soviet countries), and expressed its interest in including countries in the Arab world and Europe in the system.

Russia has sought to mobilize more support for dedollarization in multilateral forums such as the BRICS group made up of Brazil, China, India, Russia and South Africa, as well as in the Shanghai Cooperation Organization.

The BRICS New Development Bank raised money in local currencies as part of its goal to "break away from tyrannical families of hard currency".

In 2020, the members of the Shanghai Cooperation Organization stressed the importance of using national currencies in trade between each other, and also discussed the establishment of a development bank and a development fund.

Russia and China could use these forums to create a broader anti-dollar coalition, with the promise of greater fiscal independence for all by reducing dependence on the US dollar.

How will Washington respond?

The Biden administration must take this broader context into account, as it determines how best to pressure Russia to withdraw from Ukraine.

Additional tougher sanctions on Russia may help Ukraine in the short term, but they risk accelerating a broader anti-dollarization movement that in the long run could fundamentally undermine US global leadership.

The United States must consolidate the global financial system based on the US dollar if it wants to maintain the foundations of American hegemony, and it must preserve the role of the dollar as a stable public currency that is indispensable to global financial stability.

Here, the Biden administration can preserve the global supremacy of the dollar by easing tensions with China, and by encouraging Beijing to use "SWIFT" rather than resorting to the use of alternative systems.

And the United States should not go too far with its policies that would lead to a financial break with China.

Instead, US financial regulators must respond to the demands of their Chinese counterparts for greater communication and cooperation on market regulation.

US officials should also encourage more Chinese companies to list them in the US stock markets, which would motivate the Chinese to consolidate the stability of the global financial markets based on the dollar.

The United States should also undermine Russia's primary financial power: the revenue it derives from oil and gas exports.

US energy cooperation with Europe is crucial to reducing European dependence on Russian energy.

In order to achieve this, the Biden administration must provide, in the short term, alternative energy supplies to allies in Europe and Asia Pacific.

In the medium to long term, Washington should also work with its allies to counter Russia's nuclear energy exports, as Russia's absolute dominance in the global nuclear energy export market (where Russia owns 60% of this market) allows it to weaponize its dominance of technology Nuclear Energy and Fuel Supply in Times of Geopolitical Tensions.

Congress should also empower the Development Finance Corporation, the US government's development finance institution, to become a reliable source of capital for emerging markets and low- and middle-income countries.

Development finance is an important tool, but it is underutilized in improving economic efficiency.

Russia has sought to do more in its efforts to de-dollarize through multilateral development institutions, and the United States of America must respond.

Washington should raise the profile of the Development Finance Corporation (DFC), and reach out to work with the development finance institutions of America's allies, such as the Japan Bank for International Cooperation, in order to consolidate the dollar and American leadership in the global development market.

In fact, a strong US economy is the most efficient and reliable tool for confronting enemies and adversaries who seek to undermine confidence in the US dollar.

Countries and companies comply with US sanctions because they seek to maintain access to US markets, ie the US dollar, and to the broader global system led by the United States of America.

The US government should be aware of the unintended consequences of its sanctions policy and find ways to undermine the Russia-China anti-dollar partnership.

And if Washington fails to act on it;

In fact, it is choosing to throw off the mantle of global leadership from its shoulders.

_____________________________________________________________________

Translation: Karim Muhammad

This report has been translated from Foreign Affairs and does not necessarily reflect the website of Meydan.